Tuesday, October 02, 2007

POTUS on SCHIP

A friend in the White House emails me this explanation of the President's position:

This past weekend the President signed a short-term extension of a program that finances health insurance for children, called SCHIP: the State Children's Health Insurance Program. We expect the Congress today will send the President HR 976, a bill that "reauthorizes" SCHIP for five years. The President has said he will veto this bill, and we expect the House will attempt to override the veto.

This debate is generating much heat and little light. Our critics claim that, because he opposes this bill, the President doesn't want to help poor kids. That is of course untrue, so let's look at where we agree with this bill, where we disagree, and what we would do differently.

Here's where we agree.

1. We agree with the Congress that SCHIP should provide sufficient funding to States to finance health insurance for poor children. The President's budget would increase total SCHIP spending over the next five years by 20%, from $25 B in total to about $30 B. The gold line below is past funding. The green line is a straight extension of current law (called "the baseline"). The light blue is the President's proposal. (Note that the light blue line shows an even bigger 30% increase, because some States have funds they have not yet spent.)

2. We agree with the Congress that there should be no funding gap while we attempt to resolve our differences. At the same time we're "aggressively debating" the right long-term solution, it's encouraging that we have agreed not to allow funding to lapse in the short run. Last weekend the President signed a bill that will keep funding going to States through mid-November.

Here's where we disagree.

3. We think the "C" in SCHIP stands for "children". Over the past several years, adults have been added to SCHIP. Some were parents of kids with health insurance, others were adults without children. We were responsible for some of those additions, as we approved State waiver requests. We made a policy shift this year, based in part on further input from the Congress, and we're now returning SCHIP to its original purpose. Over the next few years, our policy will return SCHIP to a kids-only program. States that are now covering adults will have to move them onto Medicaid or a State program. While the advocates for HR 976 argue they share this goal, the bill doesn't match the rhetoric - it lets adults in some states back into SCHIP. And in six States (IL, NJ, MI, RI, NM, and MN), more than half of their projected SCHIP expenditures this year are for adults. We think this is the wrong direction for a program that should be about children.

4. We think SCHIP should be about helping poor kids. This bill also raises taxes to subsidize health insurance for some middle-income kids. New York wants to use Federal dollars to cover kids who are clearly not poor: for a family of four, they would like to use Federal tax dollars to pay 65% of health insurance costs for a family of four with income as high as $82,600. (We measure this in terms of a multiple of the "poverty line" - NY wants to cover kids up to "400% of poverty".)

This is a fundamental philosophical difference - should we collect more taxes to subsidize those in the middle class, or fewer taxes and subsidize only the poor? The President wants to focus Federal tax dollars on helping kids in families with incomes below twice the poverty line. Note that in the current debate, they count as "poor" kids.

We created a lot of heat by sending a letter from the head of the SCHIP program, Dennis Smith, to State Medicaid Directors. Basically, Dennis' letter says to States, "You can't expand your program to non-poor kids until you've demonstrated that at least 95% of poor kids in your State have coverage." Amazingly, this simple insistence that we help poor kids first is considered controversial.

New York has announced they're going to sue CMS. Should a childless Kansas couple with $50K of income pay higher taxes to subsidize health insurance for a New York family with two kids and $80K of income, when the Kansas family may be having trouble affording health insurance for themselves? We think not.

Congressional advocates for HR 976 argue that we have been misrepresenting HR 976 - they argue that the bill does not provide extra federal funding for all kids up to 400% of poverty. To be clear, it does not, nor have we claimed that it does. The bill does, however, provide extra federal funds to subsidize some kids who are not poor.Under HR 976:

In New York, kids up to 400% of poverty would be eligible and the State would be paid extra to enroll these kids. For a family of four, this is $82,600 of annual income.

In New Jersey, kids up to 350% of poverty would be eligible and the State would be paid extra to enroll these kids. For a family of four, this is just over $72,000.

In all other States, kids up to 300% of poverty would be eligible and the State would be paid extra to enroll these kids. For a family of four, this is just over $62,000.

5. We think the goal should be maximizing the number of kids with health insurance, not maximizing the number of kids enrolled in government health insurance programs. The President's priority is to help kids without health insurance afford the purchase of private health insurance. Unfortunately, this bill would encourage families to drop the private health insurance they have now for their kids, and instead substitute low-premium government-provided health insurance. This is called "crowd out", and it's both undesirable and a tremendously inefficient use of taxpayer dollars. If a family drops a kid's privately-purchased coverage, and substitutes health insurance financed by the taxpayer through the government, then you haven't reduced the number of uninsured kids. Our numbers suggest that, under HR 976, one in three people newly enrolled in SCHIP would be people who dropped their current health insurance to get something from the government(mostly) for free. The Congressional Budget Office estimates that under HR 976, 2 million of the 5.8 million new people enrolled in government health plans would drop private insurance to enroll.

6. We don't think you should raise taxes to pay for more spending. And tobacco taxes are regressive - they fall hardest on low-income people.

7. We think this bill is fiscally irresponsible, because it creates an unfunded and unsustainable set of promises. As you can see from the graph below, HR 976 would increase spending by 121% over five years. But it would then cut spending 65 percent over two years, to below where it is now.

This is clearly unrealistic. Once the expectation is created among individuals and the States for $14 B / year of spending, the likelihood that the Congress would actually allow a 65% funding cut is near zero. In reality, the actual projected spending probably looks like this.

The bill doesn't pay for this increased spending in the "out years", because technically it assumes the big cut after 2012. So it raises taxes by "only" $73 B over ten years, when a more realistic long-term spending assumption would require even higher taxes to offset the increased spending.

(Astute observers will notice that the historic spending on these two graphs is different from the first graph. That's the difference between when money is "allocated" to the States, and when cash actually is spend on health insurance. In the budgeting world, the first is called "budget authority", and the second "outlays".)

8. We believe this is a step toward a government-run system for all Americans. The President has made clear that he believes this is the wrong direction. He prefers a system in which the patient (and consumer) is at the center of decisions about his own health care. Moving toward more government financing, and more people in health plans chosen by the government, means less control for the patient, and more decisions made in Washington and in State capitals. This is bad.

In contrast, the President has worked with the Congress to enact changes that give patients more choices and more control over their health care (competing private Medicare drug plans, competing Medicare Advantage insurance plans, Health Savings Accounts), and he has proposed a host of other changes that move in the same direction (especially Association Health Plans, allowing people to buy insurance across state lines, and changes to the tax code, described below).

9. We believe we have a better way to help more people afford private health insurance, at less cost to the taxpayer. The President proposed a change to the tax code which would create a "Standard Deduction for Health Insurance". When combined with the President's SCHIP proposal, this Standard Deduction would result in significantly more people being able to afford (and buying) private health insurance. His proposals would combine direct assistance (through SCHIP) for poor kids, and a voluntary tax incentive for most everyone else. I'll try to describe that in more detail in a future blurb.

One House Democratic leader said that a Presidential veto would be a "political victory" for the Democrats. We're looking for those who are instead more interested in finding common ground with us on a responsible policy to help poor kids get health insurance, and to making health insurance more affordable for all working Americans.

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.